India Airlines Least in Need May Gain Most From New Rules

India’s decision allowing airlines to sell stakes of as much as 49 percent to overseas carriers may be most beneficial to operators least in need of investment.

SpiceJet Ltd. (SJET), which has said it’s in “no rush” for funds, may be the most appealing target for foreign investors because of the discount carrier’s low debt and record of profitability, said Sharan Lillaney, an Angel Broking Ltd. analyst. Kingfisher Airlines Ltd. may struggle to win investment, even as billionaire Chairman Vijay Mallya seeks new financing, after posting at least five straight annual losses.

“The biggest beneficiary will be SpiceJet as it has lower debt and a decent brand image,” Lillaney said. “Kingfisher needs to restructure its balance sheet and convert debt into equity before it can look at attracting any foreign investment.”

The two carriers jumped in Mumbai trading today on speculation the rule change will help the industry win funds following years of losses caused by price wars, high fuel taxes and a weaker rupee. Prime Minister Manmohan Singh’s government announced Sept. 14 the end of the ban along with a similar easing for retailers as its moves to open up Asia’s third- biggest economy.

Planes Grounded

Kingfisher (KAIR) has said it is in talks on investment that depend up regulatory changes as it struggles under an 86 billion rupee ($1.5 billion) debt pile. The carrier has also cut two- third of services, grounded planes and halted international flights in a bid to end losses.

“I am skeptical whether Kingfisher is able to attract” foreign investment, said Nikhil Vora, Mumbai-based managing director at IDFC Securities Ltd. “Kingfisher’s significant leverage on its balance sheet makes it a challenging proposition for any buyer.”

The airline, named for liquor tycoon Mallya’s flagship beer, needs an immediate capital infusion of $600 million for a turnaround, according to CAPA - Centre for Aviation. The company’s founders will need to provide at least half of this before talks with a foreign airline could begin, the research company said.

Kingfisher has only an “outside chance” of selling a stake compared with SpiceJet and Go Airlines (India) Ltd., CAPA said in an e-mailed statement. The carrier has a long-term debt to total capital ratio of 162 percent, according to data compiled by Bloomberg. That compares with 76 percent for SpiceJet and 58 percent for Mumbai-based Jet Air.

Shares Jump

SpiceJet rose 12 percent at close of Mumbai trading while Kingfisher jumped 20 percent. Jet Airways (India) Ltd. (JETIN), the nation’s biggest, fell 2.2 percent. The carrier isn’t eligible to win overseas funds as its founder’s 80 percent holding, routed through overseas entities, is already deemed as foreign investment, JPMorgan Chase & Co. said in a report.

Kingfisher has plunged 50 percent in the past year. SpiceJet has jumped 61 percent and Jet has risen 32 percent. India’s three other main carriers, state-owned Air India, IndiGo and Go Airlines are all closely held.

The easing of the investment rules will help Kingfisher re- engage with prospective airline investors “in a more meaningful manner,” Prakash Mirpuri, a spokesman, said in a Sept. 14 text message. The carrier will also move toward re-capitalization and ramp up its operations, he said.

SpiceJet Chief Executive Officer Neil Mills didn’t answer two calls to his mobile phone today. GoAir Managing Director Jeh Wadia, IndiGo President Aditya Ghosh and Jet Air spokeswoman Ragini Chopra also failed to answer calls.

Kingfisher Loss

Kingfisher posted a 6.5 billion rupee loss in the quarter ended June, compared with 2.6 billion rupees a year earlier. SpiceJet and Jet Air both posted profits in the period.

Non-airline investors from overseas were allowed to hold as much as 49 percent in local carriers before the rule change.

Middle East airlines may be the most likely to buy into Indian carriers because of their geographical proximity, existing service connections and state backing.

Qatar Airways Ltd. Chief Executive Akbar Al Baker said in April that that anyone who didn’t want to invest in China or India “must be crazy.”

India’s annual passenger numbers may surge to 180 million by 2020 from 61 million last year as rising wealth makes travel affordable to more people, according to a government forecast. Al Baker today said in Doha that Qatar Air is studying the Indian rule change. The carrier isn’t in talks for any alliance now, he said.

Abu Dhabi-based Etihad Airways PJSC said yesterday equity investments are an “important evolution of its successful partnership strategy.” The carrier already has stakes in Virgin Australia Holdings Ltd., Air Seychelles Ltd. and Air Berlin Plc.

‘Tremendous Potential’

“The Indian aviation industry offers tremendous potential, with significant passenger movement on domestic and international sectors,” it said without commenting on whether it wanted to buy into a local carrier. The airline will add flights to a ninth Indian city, Ahmedabad, in November, it said.

Low-cost Asian airlines may also look to expand in India following the rule change, possibly through new ventures, said CAPA. AirAsia Bhd. (AIRA), the region’s biggest discount carrier, declined to comment Sept. 14. Qantas Airways Ltd.’s budget arm Jetstar will focus on its recently opened venture in Japan and planned operation in Hong Kong before considering more affiliates, said Andrew McGinnes, a spokesman. FlyDubai, where SpiceJet CEO Mills used to work, has no plans to invest in other airlines, it said yesterday.

Dubai-based Emirates, the world’s largest international airline, also “has no plans to acquire a stake in another airline in India or anywhere else,” it said. British Airways’ parent, International Consolidated Airlines Group SA (IAG), and Deutsche Lufthansa AG both said Sept. 14 that they had ruled out investments in Indian airlines. Air France-KLM Group declined to comment.

‘Destroy the Market’

IAG Chief Executive Officer Willie Walsh said in April that India was “a great example of where governments interfere and destroy the market.” The Indian government said the same month that state-owned Air India may get 300 billion rupees of bailouts through 2020 if the unprofitable carrier hit performance goals.

India’s “regulatory bottlenecks” and “exorbitant” fuel taxes may also cause overseas carriers to shun direct stakes in favor of cooperation with local carriers, said K. Ajith, a Singapore-based airline analyst at UOB-Kay Hian Research. “An equity investment might not be able to change the dynamics.”

Billionaire Maran

SpiceJet is adding more planes and routes helped by backing from billionaire Chairman Kalanithi Maran. The carrier, which operates about 300 flights a day to around 36 cities, had a market share of 18 percent in July about the same as Air India. Discount carrier IndiGo and Jet Air both had about 27 percent, with Kingfisher on 3.4 percent, according to data from the Directorate General of Civil Aviation.

CEO Mills said in an interview last month that SpiceJet would be “attractive” to foreign investors. He also said the company had received interest from two private-equity funds and that it was in “no rush” for new investment. The airline has 10 billion rupees of short and long-term debt, according to data compiled by Bloomberg.

“Potential investors would look for a robust balance sheet and a robust business model,” said Mahantesh Sabarad, an analyst at Fortune Equity Brokers India Ltd. “Both exist for SpiceJet.”

To contact the reporters on this story: Siddharth Philip in Mumbai at sphilip3@bloomberg.net; Vipin Nair in Mumbai at vnair12@bloomberg.net

To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net

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